High fossil fuel prices have rekindled interest in nuclear power. This paper identifies specific characteristics making nuclear power unattractive to merchant generators in liberalized electricity markets, and argues that non-fossil fuel technologies have an overlooked Ôoption valueÕ given fuel and carbon price uncertainty. Stochastic optimization estimates the company option value of keeping open the choice between nuclear and gas technologies. The merchant option value decreases sharply as the correlation between electricity, gas, and carbon prices rises, casting doubt on whether merchant investors have adequate incentives to choose socially efficient diversification in liberalized electricity markets.
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Article provided by International Association for Energy Economics in its journal The Energy Journal.
Find related papers by JEL classification: F0 - International Economics - - General
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